NBFC-MFI (Non-Banking Financial Company in Microfinance) in Jharkhand

Ozg NBFC
Experts

Phone #09811415831-37-92-94

Q1. What is an
NBFC-MFI?

Ans. An NBFC-MFI is defined as a
non-deposit taking NBFC (other than a company licensed under
Section 25
of the Indian Companies Act, 1956) with Minimum Net Owned
Funds of
Rs.5 crore (for NBFC-MFIs registered in the North Eastern
Region of the
country, it will be Rs. 2 crore) and having not less than
85% of its
net assets as “qualifying assets”.

Q2. What are the documents required for registration
as NBFC-MFI?

Ans. The checklist with respect to
application for seeking Certificate of Registration from the
Reserve
Bank have been available on RBI website.

Q3. What are “Net Assets” and “Qualifying
Assets”?

Ans. Net Assets: “Net assets” are defined
as total assets other than cash and bank balances and money
market instruments.Qualifying Assets:Loan disbursed
without collateral by an NBFC-MFI to a borrower with a
household annual
income not exceeding Rs. 60,000 (rural) or Rs. 1,20,000
(urban and
semi-urban) and total indebtedness not exceeding Rs. 50,000
will be a
qualifying asset provided:

loan
amount does not exceed Rs. 35,000 in the first cycle and Rs.
50,000 in subsequent cycles;

tenure of the loan not to be less than 24 months
for loan amount in excess of Rs. 15,000 with prepayment
without penalty;

aggregate amount of loans, given for income
generation, is not less than 70 per cent of the total loans
given by the MFIs and

loan
is repayable on weekly, fortnightly or monthly installments
at the choice of the borrower.

Q4. What are the limitations imposed on an NBFC which
does not qualify as NBFC-MFI?

Ans. An NBFC which does not qualify
as an NBFC-MFI shall not extend loans to micro finance
sector, which in
aggregate exceed 10% of its total
assets.

Q5. Are there any restrictions on the remaining 15%
of the assets that an NBFC-MFI
holds?

Ans. No there are no
restrictions.

Q6. Can NBFC-MFIs lend funds for personal
use/emergencies?

Ans. A part (i.e. maximum of 30%) of
the aggregate amount of loans may be extended for other
purposes such
as housing repairs, education, medical and other
emergencies. However
aggregate amount of loans given for income generation should
constitute
at least 70 per cent of the total loans of the
NBFC-MFI.

Q7. What happens to the existing NBFCs who intend
to convert to NBFC-MFI but do not fulfill the minimum net
owned funds
criteria of Rs. 5 crore at
present?

Ans. Existing NBFCs seeking
conversion to NBFC-MFI category, were required to maintain
Net Owned
Funds (NOF) at Rs.3 crore by March 31, 2013 and at Rs 5
crore by March
31, 2014, failing which they must ensure that lending to the
Microfinance sector i.e. individuals, SHGs or JLGs which
qualify for
loans from MFIs, is restricted to 10 per cent of the total
assets. For
NBFCs operating in North Eastern Region, the minimum NOF to
be
maintained is Rs. 2 Crore

Q8. Is there any restriction on pricing of the
loan/interest recoverable on such
loans?

Ans. The interest rates charged by an
NBFC-MFI to its borrowers will be the lower of the
following:

i. Cost
of funds, plus margin

Cost of
funds means interest cost and margin is a mark up of a
maximum of 10 per cent for large NBFCs-MFI and 12 per cent
for others.
Large NBFCs-MFI are those with asset sizes above ` 100 crore

ii. The
average base rate of the five largest commercial banks by
assets multiplied by 2.75

The
average of the base rates of the five largest commercial
banks shall be advised by the Reserve Bank on the last
working day of
the previous quarter, which shall determine interest rates
for the
ensuing quarter. The Bank will announce the applicable
average base
rate on March 31, 2014 and every quarter end
thereafter.

Q9. What procedure is to be adopted for calculation
of interest cost (cost of funds) and interest income by
NBFC-MFIs?

Ans. The interest cost will be
calculated on average fortnightly balances of outstanding
borrowings
and interest income is to be calculated on average
fortnightly balances
of outstanding loan portfolio of qualifying
assets.

Q10. What are the processing charges that a NBFC-MFI
can levy on its customers?

Ans. Processing charges by NBFC-MFIs
shall not be more than 1 % of gross loan amount. Processing
charges
need not be included in the margin cap. Further, NBFC-MFIs
shall
recover only the actual cost of insurance for group, or
livestock,
life, health for borrower and spouse. Administrative charges
where
recovered, shall be as per IRDA
guidelines.

Q11. Can an NBFC-MFI charge a differential rate of
interest to its customers? If yes, is there any limit imposed
by RBI on it?

Ans. Yes, an NBFC-MFI can charge a
differential rate of interest to its customers but the
variance for
individual loans between the minimum and maximum interest
rate cannot
exceed 4 per cent.

Q12. What are the charges that a customer is supposed
to pay for the loan that he takes from an
NBFC-MFI?

Ans. A customer needs to know that
there are only three components in the pricing of a loan
viz. the
interest charge, the processing charge and the insurance
premium (which
includes the administrative charges in respect thereof). An
NBFC-MFI
cannot levy any more charges apart from the three mentioned
above.

Q13. What should a customer keep in mind when he/she
takes a loan from an NBFC-MFI?

Ans. The customer must keep in mind the
following

a. The
NBFC-MFI is fair and transparent in its dealings with the
borrower. Pl see Master Circular on Fair Practices Code,
DNBS(PD)CC No.340/03.10.042/2013-14, dated July 1, 2013, and
updated each year.

b. No
security deposit/ margin/collateral is required to be kept by
the borrower with the NBFC-MFI.

c. The
borrower should ensure that he gets a loan card from the
NBFC-MFI reflecting:

(i)
the effective rate of interest charged;
(ii) all other terms and conditions attached to the
loan;
(iii) information which adequately identifies the
borrower;
(iv) acknowledgement by the NBFC-MFI of all repayments
including installments received and the final
discharge;

d. All
entries in the Loan Card should be in the vernacular
language.

e. The
interest charged to customer is calculated on a reducing
balance basis.

f.
NBFC-MFI does not levy penalty on delayed
payment

Q14. How can a borrower find about the current
interest rate being charged by the
NBFC-MFI?

Ans. RBI has made it mandatory for
the NBFC-MFIs to prominently display in all its offices and
in the
literature issued by it and on its website, the effective
rate of
interest being charged by it.

Q15. Is there any prepayment penalty that can be
levied by an NBFC-MFI?

Q16. Is there any cap on an individual membership
with SHG/JLG and/or number of MFIs from whom a SHG/JLG/an
individual
can borrow?

Ans. A borrower can be a member of
only one SHG/JLG or borrow as an individual. He can borrow
from
NBFC-MFIs as a member of a SHG or a member of a JLG or borrow
in his
individual capacity. Further, a SHG or JLG or individual
cannot borrow
from more than 2 MFIs.

Q17. Is it essential for NBFC-MFI to become a member
of a Credit Information
Company?

Ans. Every NBFC-MFI has to be a
member of at least one Credit Information Company (CIC)
established
under the CIC Regulation Act 2005, provide timely and
accurate data to
the CICs and use the data available with them to ensure
compliance with
the conditions regarding membership of SHG / JLG, level of
indebtedness
and sources of borrowing. While the quality and coverage of
data with
CICs will take some time to become robust, the NBFC-MFIs may
rely on
self certification from the borrowers and their own local
enquiries on
these aspects as well as the annual household
income.

Q18. What is the minimum moratorium period applicable
in case of NBFC-MFIs?

Ans. There must be a minimum period
of moratorium between the grant of the loan and the due date
of the
repayment of the first installment. The moratorium shall not
be less
than the frequency of repayment. For example, in the case of
weekly
repayment, the moratorium shall not be less than one
week.

Q19. There have been a lot of issues related to
methods of recovery used by the MFIs. How has RBI addressed
this problem?

Ans. Taking into cognizance, the
alleged coercive methods of recovery adopted by MFIs, RBI
has mandated
that NBFC-MFIS shall ensure that a Code of Conduct and
systems are in
place for recruitment, training and supervision of field
staff,
incorporating the Guidelines on Fair Practices Code issued
for NBFCs
vide circular CC No.266 dated March 26, 2012 as amended from
time to
time. Also, Recovery should normally be made only at a
central
designated place. Field staff shall be allowed to make
recovery at the
place of residence or work of the borrower only if borrower
fails to
appear at central designated place on 2 or more successive
occasions.

Q20. Is there a difference in the asset
classification and provisioning norms that are applicable to
the NBFC-
MFIs and other NBFCs?

Ans. Yes, there is a difference in
the norms applicable to the NBFC-MFIs. For NBFC-MFIs
non-standard asset
would mean an asset for which, interest / principal payment
has
remained overdue for a period of 90 days or more, and for
which
provisions of 50 percent of the aggregate loan instalments
which are
overdue for more than 90 days and less than 180 days or 100
percent of
the aggregate of loan instalments which are overdue for a
period of
over 180 days is to be made.

Q21.What are the capital adequacy requirement for
NBFCs-MFI?

Ans. All NBFC-MFIs shall maintain a
capital adequacy ratio consisting of Tier I and Tier II
Capital which
shall not be less than 15 percent of its aggregate risk
weighted assets.
The total of Tier II Capital at any point of time shall not
exceed 100
percent of Tier I Capital.

Q22. What is the dispensation given to AP based
NBFCs which are not able to comply with the CRAR
requirements?

Ans. To be able to
facilitate the registration for those AP based NBFCs which
are not able
to comply with the capital adequacy requirement, for the
purpose of
calculation of the CRAR, the provisioning made towards AP
portfolio can
be notionally reckoned as part of NOF and there shall be
progressive
reduction in such recognition of the provisions for AP
portfolio
equally over a period of 5 years. Accordingly 100 per cent
of the
provision made for the AP portfolio as on March 31, 2013
would be added
back notionally to NOF for CRAR purposes as on that date.
This
add-back would be progressively reduced by 20 per cent each
year i.e.
up to March 2017. No write-back or phased provisioning is
permissible.

However, capital adequacy on non-AP portfolio and
the notional
AP portfolio (outstanding as on the balance sheet date less
the
provision on this portfolio not notionally added back) will
have to be
maintained at 15 per cent of the risk weighted
assets.

Q23. Are the credit concentration norms applicable
to NBFCs-MFIs?

Ans. No, the credit concentration norms
as provided for in the Prudential Regulations Directions
vide Circular No. DNBS.(PD).CC.No.333/03.02.001/2013-14 July
1, 2013 are not applicable to NBFC-MFIs.

Q24. Are there any additional dispensations on
provisioning and risk weights provided for NBFC-MFIs other
than those
related to AP –based portfolios provided
earlier?

Ans. Yes, for loans extended on the
lines of credit facilities guaranteed by Credit Guarantee
Fund Trust
for Micro and Small Enterprises, it has been decided that
zero risk
weights and no provisioning is to be made towards the
guaranteed
portion

Q25. Are there any specific corporate governance
guidelines applicable to
NBFC-MFIs?

Q26. What is the role of a Self Regulatory
Organization (SRO) in the monitoring of functioning of
NBFC-MFIs?

Ans. The industry associations (SROs
in this case) are expected to be responsible in ensuring
compliance by
the Non-Banking Financial Companies that are engaged in
microfinance
(NBFC-MFIs) with the regulations and code of conduct and in
the best
interest of the customers of the NBFC-MFIs. The membership
of NBFC-MFIs
in the industry association/SRO will be seen by the trade,
borrowers
and lenders as a mark of confidence and removal from
membership will be
seen as having an adverse impact on the reputation of such
removed
NBFC-MFIs.

Q27. What is the responsibility of a SRO with regard
to the Microfinance sector?

Ans. The SRO holding recognition
from the Reserve Bank will have to adhere to a set of
functions and
responsibilities, such as formulating and administering a
Code of
Conduct recognized by the Bank, having a grievance and
dispute redressal
mechanism for the clients of NBFC-MFIs, responsibility of
ensuring
borrower protection and education, monitoring compliance by
NBFC-MFIs
with the regulatory framework put in place by the Reserve
Bank,
surveillance of the microfinance sector, training and
awareness
programmes for the members, Self Help Groups, etc and
submission of its
financials, including Annual Report, to the Reserve
Bank.

Q28 Is it essential for an NBFC-MFI to be a member
of the Self Regulatory Organisation
(SRO)?

Ans. Membership to the SRO is not
mandatory. However, NBFC-MFIs are encouraged to voluntarily
become members of at least one SRO.

Source:
RBI

Ozg NBFC
Experts

Email: ask@nbfc.in

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